In today’s Outside the Box, Scott Minerd, chief investment officer of Guggenheim Funds, regales us with the not-always-happy history of Keynesian economics – we did what he said when we had to, but not always when we should have. Shoving fiscal and monetary stimulus down the throat of a recession is well and good, but how about the part where we’re supposed to be fiscally conservative during boom times? “What, raise taxes? No thank you!”
The upshot, as Minerd reminds us, is that “As a result of the constant fiscal support without the tax increases, businesses and households became comfortable operating with continuously higher leverage ratios. The conventional wisdom was that this government backstop could never be exhausted.” Today we are testing that premise to the limit, and not only in the US.
Keynes forged his ideas in the fires of the Great Depression, but his disciples have, as Minerd wryly notes, “carried his views much further than could have been imagined during the period in which the master lived.” Consequently, the downturn we now struggle to escape from is very different from the one that plagued the world of the 1930s. The key difference, Minerd tells us, is that:
… for the first time since the 1930s, we have had severe asset deflation (declining real prices) in the face of relative price stability. Periods of asset deflation occurred between the 1960s and 1990s, but nominal prices were supported by rising inflation levels…. This protected asset-based lenders from severe losses resulting from declining nominal prices.
During the 2008 crisis, inflation levels were close to zero and unable to offset falling real asset values to stabilize nominal prices. This caused a debt deflation spiral to take hold as nominal prices fell. In contrast to the Great Depression, policymakers took extreme measures in 2008 to prevent a total collapse of the financial system and head off a deflationary spiral like that experienced in the 1930s. These policies included sharply increasing the money supply and engaging in an unprecedented amount of deficit spending.
To say the least. And all the easing and deficit spending worked to stave off financial disaster – up to a point. The problem is, we have just about reached that point – the point where, as Rogoff and Reinhart have so firmly instructed us, things turn out not to be that different after all. So let’s jump into Minerd’s take on the big picture, and see what he thinks the implications are for our investments.
But first, let me reveal that I find myself in Palm Springs this morning, getting ready to take a few hours off and embarrass myself with friends at the Indian Wells Golf Resort. Greg Weldon was on the plane last night (at 6’10”, he has to be the tallest analyst in the writing game), and he told me to bring my “A” game to the golf course, as we’d be playing together. I just laughed and said I didn’t even have an “X” game. I think if I shoot anything close to 120, I will just declare victory and walk to the clubhouse with a smirk. Big difference from my attitude in the “old days,” when I had time (and a back) to play. Bottom line: It’s a great course and a beautiful day, and I don’t make my living with a golf club in my hand. Greg, on the other hand, brings the same intensity to everything he does, whether it’s trading or golf or the World Series of Poker. I will watch him exult and curse, maybe on the same hole. I only get intense these days when I write. C’est la guerre.
Grant Williams is in town, and we will be spending a lot of time the next few days comparing notes and doing some videos for our readers (that would be you, and you’ll see them shortly). As everyone knows, I am a huge Grant Williams fanboy. It helps that he is also one of the nicest human beings anywhere.
I am speaking at the Cambridge House Natural Resources Conference here. Rick Rule of Sprott is coming in, and we will have dinner. My Mauldin Economics team partners are also in town, to help with the video and plan out some great new letters. I am really excited about the directions we are taking. They are opening up whole new ways for me to help you.
Oddly, it is colder here in Palm Springs than it was back in Dallas, but pleasant all the same. Have a great weekend.
Your wondering where his ball went analyst,
(The real editor’s note: John apparently finished this on his iPad at the third hole. He was probably not kidding about having lost his ball.)
John Mauldin, Editor
Outside the Box
The Keynesian Depression
A Premonition From a Halcyon Era
By Scott Minerd, Chief Investment Officer, Guggenheim Funds
In 1968, America was literally over the moon. Apollo 7 had just made the first manned lunar orbit and the nation would soon witness Neil Armstrong’s moonwalk. The United States was winning the war in Southeast Asia and the Great Society was on the verge of eliminating poverty. I remember my father taking me…